Good Debt?? There is No Such Thing
Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you’ve taken on for things you don’t need and can’t afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt since it usually carries the highest interest rates.
I agree 100% with their take on bad debt where I disagree is on their definition of good debt.
First off, let’s be clear, there is no such thing as good debt. Saying there is good debt, is like saying there are good criminals, or good pirates, or good cigarettes. Debt is bad, be it credit card debt, car loans, mortgage, you name it. It’s all bad.
With that out of my system, what I will concede to is that there are different levels of “badness”. So let’s create a badness meter that rates debt baddest* to bad (Baddest, Really Really Bad, Really Bad, and Bad). Here’s how I see the debt types ranking:
Credit Card Debt = Baddest
Car Loans =Really Really Bad
Trip to Bora Bora = Baddest (most likely it’s on a credit card)
Student Loans = Bad
Mortgage = Bad
Borrowing to Invest = Really Really Bad
Let’s dive in a little deeper…
Credit Card Debt
I probably don’t need to say much here, but this is hands down the worst type of debt you can have. The interest rates are high, you generally have no associated asset, and they are full of “gotchas” like rate hikes and fees. Not to mention they make it far to easy to spend more than you earn and ask you to pay minimum payment that on average will leave you in debt and paying interest for 12 1/2 years.
The CNN money article tells us that paying for a car outright is the best option. I agree, but the article also tells us that most people can’t afford to do this. I completely disagree.
People can’t afford to because they are buying too much car. If you need to use someone else’s money to buy that car you want, than you don’t need it…not to mention you can’t afford it.
Cars are one of the biggest depreciating assets you can purchase. Borrowing money on a quickly depreciating asset doesn’t make good sense, nor does it make mathematical sense.
If you absolutely need a car, buy a used junker. Drive it around while you save some money, sell the junker and buy a nicer car. Keep working your way up.
By the way, the average millionaire drives a used car too. The average “in debt up to their eyeballs”aire drives a new BMW 7-series. One sweet car I’ll admit, but way way too pricey. Tell you what, if you are a millionaire (i.e. your net worth is 1 million or more) and you really want to drive one of these, I won’t fuss at you, as long as you let me drive it.
Trip to Bora Bora
First off, I’ll admit I have no idea where Bora Bora is, but regardless using your credit card to go there isn’t smart. Save up cash for your vacations. Create a special vacation savings fund. I promise, using cash for your vacation will make the whole trip a lot more fun. It keeps you from bringing the vacation expenses home and not having to pay for them for the next 12 1/2 years.
Personally, I don’t think they are necessary, but maybe that’s a topic for another article. I would say that if you are going to borrow money, doing so to pay for your education is probably one of the best uses of debt. What I would ask you though is why can’t you go to the local state school, work a part time job and pay for it yourself? You’ll also be amazed at the number of scholarships available if you do a little digging. Oh, btw I am a manager and interview and hire people all the time. I don’t care what school you went to as long as you can do the job nor is the pay any different.
Don’t get caught up in the mistake of thinking you have to liquidate your retirement fund to pay for your child’s college. It won’t hurt them to pay for it. I paid for some of mine working 35+ hours a week, and I learned a lot more AND appreciated my education more as well.
Considering we are seriously wanting to buy another house out in the country with some land, this type of debt has really been digging away at me. I hate debt, I really do. The reality is houses are expensive and when you have 6 kids like I do, a small house just doesn’t cut it. So I have been doing a great deal of praying, researching, and thinking about the whole mortgage topic.
I have decided, while it’s still bad, it is something I will be willing to do for only one reason and one reason only: The house is worth more than the amount owed. What this basically means is that if I get into a situation where I can’t make the payments, or don’t want the house anymore, I can sell it, and either break even or make a profit.
The trick here is to use a large down payment (20%) AND to make sure you don’t pay too much for the house.
Borrowing to Invest
The last bullet leads me to another quote from the article:
Sometimes the decision to borrow doesn’t hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you’ll spend in interest on a loan versus what your money could earn if it were invested.
This makes mathematical sense right? And knowing how good we are at predicting the market we know what we can earn right?
I think this advice might be ok for some of the more risky and VERY financially disciplined people out there, but for the general population, this is just bad advice. Let’s face it, most of us are not good at math, otherwise we wouldn’t use credit cards, borrowing $40,000 for a car or SUV that will be worth $20,000 in 2 years (if we’re lucky), or better yet paying 18% interest on that meal at Red Lobster one evening when we didn’t feel like cooking. So for the rest of us, myself included, this is not good advice, not to mention it’s pretty risky.
* Yes, I know this baddest isn’t a real word…I like it anyway :-)
What do you think? Do you feel there is “good” debt? Which debt do you consider the “Baddest” ?